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IMF knocks eco package as too soft

Although the International Monetary Fund (IMF) applauded the intent of the cabinet's economic austerity package during its January 25-29 visit to Slovakia, IMF mission leader Robert Feldman said the measures were too vague and too mild to bring the economic results the government was predicting.
Slovak economic analysts agreed, saying that the government would have to apply further austerity measures later this year if it was really serious about meeting its budget targets.
The package sets out a timetable of proposed laws and measures with the overall aims of cutting the state budget deficit from 5% of the GDP to 2%, and cutting the current account deficit in half from 11% to 5-6% of GDP. The cabinet claims this can be accomplished while maintaining a growth rate of 3% and keeping inflation under 10%. The economy's current growth rate is 5.8%.


Chewing it over. Economy Minister Ľudovít Černák (left) reflects on the economic package with Prime Minister Mikuláš Dzurinda and Finance Minister Brigita Schmögnerová on February 2.
photo: TASR

Although the International Monetary Fund (IMF) applauded the intent of the cabinet's economic austerity package during its January 25-29 visit to Slovakia, IMF mission leader Robert Feldman said the measures were too vague and too mild to bring the economic results the government was predicting.

Slovak economic analysts agreed, saying that the government would have to apply further austerity measures later this year if it was really serious about meeting its budget targets.

The package sets out a timetable of proposed laws and measures with the overall aims of cutting the state budget deficit from 5% of the GDP to 2%, and cutting the current account deficit in half from 11% to 5-6% of GDP. The cabinet claims this can be accomplished while maintaining a growth rate of 3% and keeping inflation under 10%. The economy's current growth rate is 5.8%.

But the package's emphasis on cutting the deficit drew fire from some critics, who said the government should be looking just as hard at other things.

"The package focuses mainly on cutting the fiscal deficit, but the biggest problem is extra-budgetary spending," said Ján Tóth, an analyst with Tatra Banka.

The government's plan to reduce the deficit to 15 billion Sk ($406 million), which is based on expectations of collecting 23 billion Sk in non-tax revenues, is a bit risky, he added, especially as only 4 billion Sk is allocated to repay state-guaranteed loans in 1999. A report issued by the Economy Ministry on February 2 said the state would have to pay 6.9 billion Sk in installments on state-guaranteed loans next year.

According to Tóth, the first half of 1999 will be a crucial test of both the government's resolve to deal with its economic problems as well as its ability to attract foreign investment into the Slovak market. "The cabinet would gain credibility and respect with more radical measures," Tóth said.

But cabinet officials say that they are committed to meeting the economic development figures set out in the plan, and if these are not likely to be met, further measures will be applied.

Peter Švec, the Finance Ministry spokesman, said that both Finance Minister Brigita Schmögnerová and Deputy Prime Minster for Economy Ivan Mikloš had told the IMF delegation that the cabinet was "aware of the risks, on which the revenues part of the budget was built, but said they were willing to consider further austerity measures to meet its desired limits."

IMF's main beef

According to Švec, the IMF's Feldman had been most concerned by the government's expenditures on highway construction, which are planned at 8.9 billion Sk ($241 million) in 1999.

Feldman warned that this could lead to a 3.5 billion Sk ($100 million) deficit in general government spending, and not 1 billion Sk ($27 million) shortfall as outlined by the cabinet. "Finance Minister Schmögnerová said, however, that the plan had not yet been approved and could still be negotiated," Švec said.

Ivan Chodák, an analyst with Creditanstalt Bank, cited other cabinet expectations as overly optimistic, such as an inflation rate of under 10% (in a year of price hikes and deregulation) and an economic growth rate of 3%. "Further measures will have to come, and I think they [the government] will have to take some of the IMF proposals into account," he said.

The IMF's Feldman proposed, among other things, that the cabinet restructure the system of social welfare, which swallowed up approximately 28 billion Sk ($760 million) of the 197 billion Sk ($5.2 billion) in budget expenditures in 1998.

"Perhaps, with the growing unemployment, the cabinet will have to apply measures to lower the number of people eligible for welfare," Chodák said.

In the end, however, Chodák did not fully endorse the IMF's criticism of the cabinet's package, saying that the IMF had not considered all aspects of the Slovak economy but had focused instead on monetary policy. "The IMF always proposes very radical and rather one-sided measures," he said. "They come only when there's a critical situation in the country, and propose precautionary measures when healing ones should be applied."

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